ChangeThis
Social Capital Value Add
Michael Cayley
Value Based Management for the Networked Age
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As the volume
of transactions like the acquisition of YouTube, the write down of
Skype, the investment in Facebook and many lower profile deals increases, clearly there is a need for
corporate managers and investors to better understand the drivers of value. A June 23, 2008 blog
post by leading tech blogger Michael Arrington entitled “Modeling the Real Market Value of Social
Networks” has received more than 200 comments underscoring the search for answers.
Why introduce Social Capital Value Add (SCVA) when brand valuation and other schools of valuebased management such as Economic Value Added1 (generically known as economic profit) are
already well known and do not require delving into entirely new areas of theory and complexity?
We have run out of short answers to neatly explain this point of inflection for business. Arrington’s
deal-driven set of weighted valuation comparables may be useful for discussion about a limited
set of social network software applications, but how useful can it be as a guide into the so-called
“Enterprise 2.0” era?
If you believe that the idea in this electronic document will live or die in the next few moments while
you decide what to do with it, you need to take a step back.
Like a deer in the headlights, your point of view may be suffering from what Marshall McLuhan might
describe as a narcotic numbness.1
Perhaps you are only considering this document’s broadcast qualities. Maybe you are stuck on its
slogan-like title, poignant pull-out quotes, memorable visual images or quick & easy bullet points.
I hate to get all “meta” on you, but you are clearly not considering the structural factors that have
led this idea to you.
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Remember! This is a ChangeThis manifesto. That means two things that are vital to understanding
the business environment we all work in:
1. You are looking at a new media copy of “Introducing Social Capital Value Add”.
It is physical evidence that this idea has replicated. Replication is a major feat of survival.
Everything involved in this replication is evidence of the persistence of this idea.
It is evidence that this idea may have attributes that will enable it to survive even before it has
a snappy visual image like “the Long Tail” or a top 10 list format that you can flip through in less
than two minutes.
2. This idea has come to you through a trusted source. A friend, mentor, colleague or other
mediator to whom you have granted access to your attention has elected this idea as worthwhile for
you.
They are the source of replication.
This idea is persisting primarily through a convergence of new media and social networks.
This simple bit of reasoning is critical insight to anyone who is interested in spreading ideas.
Understanding how and why messages are transmitted (particularly electronically) from one person
to another is a source of power and value. This is true if you are a preacher, politician, teacher or
blogger. It is also true for corporations.
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SCVA is designed to make this simple bit of reasoning an intrinsic part
of corporate motivation.
It is a response to the shortcomings of the more remedial examinations of social media and social
networking that have taken place in the popular media and self-referencing blogosphere over the last
few years.
Understanding how and why messages are
transmitted (particularly electronically) from one
person to another is a source of power and value.
Send this message to every C-level executive, board member and investor that trusts you.
The corporation needs to evolve.
Every corporation is exposed to an entirely new form of risk that each has a fiduciary responsibility
to mitigate.
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Sometime in 2004, when broadband internet access in the United States became more prevalent
than connections with less capacity, there was a “strategic inflection point”2 that has changed how
corporations may create and preserve value.
Social Capital Value Add is proposed as a guide to investors and corporate managers in their
efforts to understand the new risks brought about by these changes, to identify corporations that are
more or less qualified to deal with these risks, and to track specific performance in these
areas relative to other companies, history and projections.
The marketing/communications mix is completely different than it was before 2004. Broadcast’s
monopoly on attention is dead. The symbolic brand, which has been the fastest growing source of
corporate value for the last quarter century has reached its pinnacle. It is being absorbed and replaced by memetic brand. Technologies have evolved and mapped so tightly to the way humans
transact, form relationships and create self-identity that it is time for business management to link
the pioneering academic studies of social capital and social network analysis (SNA) to value based
management and the priorities of marketers.
The transition required is no less abrupt than that moment when the search of Dorothy, the Tin Man,
Scarecrow and Lion reaches confrontation with the Great Oz façade and the curtain is pulled back
to reveal a mere mortal. The corporation is at risk of being the “humbug” caught shouting into the
loudspeakers and pulling at the mechanistic levers of the past.
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The Great Oz Facade: The Shortcomings of Symbols
On August 9, 1995, Netscape—the company founded by twenty-something Marc Andreesen that
introduced the first graphical Internet browser—went public at $28 a share and closed that day
trading at $58.25.4 By November of 1998 the company managed a successful sale to America Online
Inc. at a valuation of $4.2-billion.5 On October 24, 2007 Microsoft bought a 1.6 per cent stake in
Facebook for $240-million, placing a $15-billion valuation on the online social network application
company that launched in a Harvard dorm room in 2004. Facebook had estimated annual revenues of
around $100-million at that point.6 At age 23, Facebook’s founder and CEO Mark Zuckerberg has
become the poster boy for the next generation of continuous, fast-moving innovation in communications technology. Meanwhile, Andreessen is behind Ning, his own entry into the social network
application market.
As symbols, these two innovators exemplify extraordinary corporate value creation. Much like the
term, “Web 2.0,” coined by O’Reilly Media for a 2004 technology conference, they are de facto brands
that have emerged to represent very complex shifts in the business environment. Recognizing symbols like these, taunting and teasing them for meaning, is the preoccupation of the vast majority of
the material that has been published about social media and social networks over the last four years.
Focusing management on delivering results against meaningful performance measures in today’s
business environment is not as trivial.
SCVA is intended to provoke new insights and management practices that may be applied to a wide
range of confusing phenomena that challenge today’s corporations.
Popular book and blog author Seth Godin has observed a class of a few million “Digerati” who are
dedicated to “using the learning tools built into the Net to get smarter, faster” (Godin, 2005) and he
himself evangelizes marketing methods aligned with SCVA. However Godin also notes the minority
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status of these examples. He describes a new digital divide separating such early adopters from
the rest of business investors and managers.
SCVA is an attempt to appeal to the sensibilities of the early majority, shift attention away from
brand in business circles and bring attention and investment to radically new methods of value
creation. There is not much here that will impress the Digerati.
The supporting arguments may even be familiar. Thomas Friedman has attempted to drive bottomup awareness and mass adoption of these new methods of value creation with a gigantic metaphor
and educational effort targeted at individuals in The World is Flat. Malcolm Gladwell picks up on
associated tactical marketing communications dynamics in The Tipping Point and Duncan Watts is
provocative at the level of product/idea positioning and design.
Now, SCVA would like to facilitate this crossing of the chasm by placing the typically unseen structural sources of corporate control in the networked age directly on the boardroom table, using
the carrot of increases in corporate value and the stick of performance metrics (along with a Wizard
of Oz metaphor to keep the marketing folks awake).
Focusing management on delivering results
against meaningful performance measures in
today’s business environment is not trivial.
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In 1988, a beer lover named John Murphy and his team conducted the world’s first brand valuation
for RHM Group in the UK7, a food company fighting off a hostile takeover bid. A year later they were
hired by Grand Met to conduct a valuation of the Pillsbury brand portfolio as part of a $5.2 billion
takeover bid. “It was the wave of brand acquisitions in the late 1980s that exposed the hidden value
in highly branded companies and brought brand valuation to the fore.”8
In the context of Microsoft’s $45-billion hostile takeover bid for Yahoo!, the time and money that will
be required to develop SCVA and apply its associated valuation method seems reasonable. Using the
SCVA argument, Yahoo’s board may present a plan to refocus its business on the assets that originally made it a leader. It could outline how a merger with Microsoft would dilute the quality of its
future earnings and perhaps encumber any structural assets it has to compete with Google, i.e. social
networks that are maximized for social capital. Microsoft, on the other hand, may be able to justify a
higher bid.
Companies like Google and Amazon have brand valuations among the 100 most valuable in
the world, overtaking decades-old brands with a fraction of the time and money invested.
By any existing definition, the premium valuations paid for Facebook, MySpace, YouTube and many
other companies including eBay’s US$2.6 billion acquisition of Skype (since written down by
US$900-million, an interesting move worth further study), are not attributable to the traditional
notion of brand.
The vast majority of corporations do not understand how to tap into the extraordinary value creation
dynamics represented by MySpace and Google. Nor do they understand how the business factors
lifting MySpace and Google are exposing their sacred cash cows to new risks.
This ChangeThis manifesto is a call for investment in understanding.
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SCVA is a spin-out9 of brand management. It is designed to bring talent and resources to the
relatively unexplored structural value drivers of social network throughout the corporate
ecosystem. It will distinguish new scaled up forms of social capital that are attributable to broadband empowered individuals within the traditional boundaries of corporate goodwill.
Symbolic gestures and frenetic time-starved attention will not accomplish the SCVA mission to
empower investors and management with the framework to differentiate more valuable corporate
assets (i.e. social networks maximized for social capital) from less valuable ones, and, in so doing,
enable the establishment of measurable corporate goals and objectives.
SCVA is based upon years of observation, research and scholarship from what I consider some of the
best business minds of our time. With an authentic commitment to succeed in the networked era,
SCVA can help any business accomplish its mission.
Consider the following four points, which are the four main sections of my eBook on the topic,
Introducing Social Capital Value Add.
1. Yellow Brick Road “On Ramps”: Social Capital, SNA & the Corporation
SCVA adapts Duke University Professor Nan Lin’s10 “structuralist” definition of social capital, as
“a concept, rooted in social networks and social relations, and must be measured relative to its
root” (Lin, 1999, pp.35) and draws upon the work of Brian Uzzi from the Kellogg Graduate School
of Management to provide a compelling case for the adoption of SCVA by investors and managers
who are interested in “increases (in) economic effectiveness along a number of dimensions which
are crucial to competitiveness in a global economy, [including] organizational learning, risk-sharing,
and speed-to-market.”11
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2. We’re Off to See Be the Wizard: The Rise of the Individual as Medium
With some prompting from Marshall McLuhan, SCVA pushes beyond the typically campaign-driven
goals and objectives that dominate contemporary social media discourse12 to focus on understanding
the effects of new technology and new media. McLuhan urges us to look for “new scales” of activity
that are introduced into human affairs by these extensions of ourselves. The intrinsic elements of
social capital are a useful framework for bringing into focus the new environment that business
faces, including new scales of information flow, social influence, social credentials and individual
identity and recognition.
3. “Pay no attention to that man behind the curtain”: Brand and Social Capital
The strategic shift from the broadcast paradigm to the Individual as Medium, examined through
Burt’s Structural Holes theory of the social structure of competition, brings to light implications
throughout the corporate ecosystem. Examining how Structural Holes theory builds upon the work of
Mark Granovetter’s “Strength of Weak Ties” idea launched twenty years earlier, it “captures the causal
agent directly and thus provides a stronger foundation for theory and clearer guide for empirical
research.”13 Understanding the relative merit of “Structural Holes” and “Strength of Weak Ties” is a
great blueprint for opening up thinking about the relative ideas of brand and social capital (i.e.,
explicit content vs. network structural assets; The Oz vs. The Yellow Brick Road)
4. Over the Rainbow: The SCVA valuation method
The goal of the SCVA valuation method is to place a dollar value on a company’s most promising
social capital, calculated as net present value (NPV), or today’s value of future earnings that a company’s SCx (scaled up forms of social capital) is accountable for. This number will become the best
top-line measure of how SCx is driving a company’s economic performance. As with all valuation
methods, SCVA is a snapshot based on context at a point in time. With this benchmark of the
overall worth of a company’s SCx, investors and managers will be able to compare the company to
its competitors, its history and to track its actual performance against projections.
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SCVA’s valuation approach is a relative of brand valuation technique championed by Interbrand
and economic profit advanced by Stern Stewart & Co.’s trademarked formula of Economic
Value Added, both of which are derivatives of the overall practice of value based management.14
The three components of the SCVA formula are Financial Analysis, SCx Factor and the SCx Inventory.
1. Financial Analysis
Human capital is the primary source of competitive intangible earnings for today’s corporations.
So a major challenge for SCVA is to propose a consistent approach that highlights only the portion
of human activity behind SCx, a new driver of corporate growth and value that deserves particular
management attention.
Ideally, SCx will be the fastest growing segment of earnings. Its unique role in B2B businesses will
require unique management and it is essential to the efforts of all companies defending brands
established during the broadcast era (like ‘Dan Rather’ or ‘Dell,’) or launching relatively new brands
(like “Agent Provocateur” who, when counted in July of 2007 for a Times Online article, had received
360 million views over five years since releasing this Kyle Minogue video).
2. SCx Factor (SCxF)
Brand valuation makes adjustments to account for cash flows that are attributable to certain legal
intangible assets such as copyrights, patents and trademarks. Next, brand valuation technique
relies on the development of a proprietary “role of brand” factor to determine what percentage
of intangible earnings are generated by the brand, based upon survey work studying the brands
and categories examined. The survey work is an estimate of the minds of buyers as they reflect
upon their decision made at the time of purchase.
SCVA, on the other hand, relies on a series of audits and ratios to make its determinations.
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Digital Footprint Audit
This is a customized search of the entire internet to identify every piece of content that contains a
reference to the corporation being valuated. Is this possible? A September 13, 2006 report entitled,
“The Forrester Wave™: Brand Monitoring, Q3 2006” evaluates seven leading vendors who may be
capable of performing this audit, including Biz360, Brandimensions, Cymfony, Factiva, MotiveQuest,
Nielsen BuzzMetrics, and Umbria. I would add Radian6 as a notable addition to this group.
The outcome of the DF Audit is the Total Digital Footprint (TDF).
Social Identity Audit
This is an analysis of the Digital Footprint results to distinguish all of the content that is attributed
to an individual identity and creates a list of all associated identities. The SI factor.
Social Engagement Audit
This is a collection and analysis of the recorded correspondence that the corporation has with individual identities. This includes email, on the Web and through subscriptions, billing, warranty registrations, administration and all customer lists. The SE factor.
Social Capital Opportunity
Identities discovered during the Social Identity Audit are then searched for matching identities from
the Social Engagement Audit. These matches provide the sum Social Capital Opportunity (SCO).
SCxF does not delve into the qualities of the social capital or the associated earnings that it is
identifying (SCx Inventory does). It relies on two basic assumptions:
i. An account of a company’s total digital footprint (i.e. its entire digital existence) is equal
to an account of a company’s total value added earnings.
ii. The portion of a company’s web presence that is a product of meaningful social interactions
correlates to the portion of value added earnings that are subjected to these interactions.
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Whether portions of SCx are positively applied to develop earnings or are a negative drag on earnings
is not determined by SCxF. For example, let us use a Google search for “Wal-Mart” as a bad proxy
for the company’s digital footprint. It returns more than 55 million web pages. A Google search for
“Agent Provocateur” returns less than 2.5 million web pages. For the most part, Wal-Mart is a business that was built prior to 2004. Wal-Mart’s value added earnings may prove to be highly exposed
to SCxF and, in the absence of strategies to focus on this exposure, may experience growing risks.
Agent Provocateur has adopted methods and tactics designed to leverage SCx. Its business may also
be highly exposed to SCxF. However, this exposure could be a stable source of high margin, and
rapid growth. SCxF simply illustrates the relative exposure that any company has to SCx in a way that
is consistent, meaningful over time, and powerful for investors and executive management.
3. SCx Inventory (SCxI)
Using the Wal-Mart/Agent Provocateur example cited above, we have noted that SCxF demonstrates
that both companies, indeed all companies, will have a portion of their value added earnings
exposed to the effects of SCx. The question that SCxI addresses is the relative risk of these SCx
exposed earnings materializing over the projection period. In deriving net present value of forecasted
earnings, the standard practice, accepted by finance professionals and rooted in financial theory,
is the development of a discount rate that represents the relative risk profile of earnings. In this case,
we want to determine the relative risk to value added earnings attributable to SCx.
In very practical terms, SCxI can be envisioned as a vertical specialization or extension of the talent
management practiced by many leading firms such as GE, EDS and many banks and consulting
companies.15 SAP already integrates talent inventory management and “visualization capabilities to
enhance and extend the SAP(R) ERP Human Capital Management (SAP ERP HCM) application”.16
The difference is that SCxI will specifically track SCx resources available through connections among
both employees and assets outside the traditional boundaries of the corporation (vendors, consumers, resellers, analysts, media, investors, etc).
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Follow the Yellow Brick Road: The need for new structural management methods
“There’s less to Facebook and other social networks than meets the eye.”
“Silicon Valley’s craze for the ‘social graph’ … is overdone.”
“For bigger companies such as Google, the (social) graph is simply the web of links among its many users.”17
From the October 18th, 2007 issue of The Economist.
How should a global investor or senior business
e xecutive evaluate this information?
Fortunately, pioneers have been labouring in the field of social capital since as early as 198018 (Bourdieu). The
lineage of social network analysis can be traced back to three main traditions
(sociometric/graph theorist, clique formation, structure of community relations) with roots in the 1930s,
eventually brought together again at Harvard in the 1960s and 1970s, when contemporary social network
analysis was forged.19
“Introducing Social Capital Value Add” is not an attempt to review or even proclaim a command
of these existing literatures; it is designed to build bridges between these knowledge clusters,
value-based corporate management and the priorities of marketers.
So, in the time-honored tradition of the Internet that “proved to the world that making something free as a
driver would make a huge difference in making it a standard”20 please follow this link
to get your full e-book version of “Introducing Social Capital Value Add”.
The e-book contains over 200 hyperlinks to enable you to quickly explore areas that may be
foreign to your typical area of expertise.
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Footnotes
1. The formula for calculating EVA is as follows:
EVA = Net Operating Profit After Taxes (NOPAT) (Capital * Cost of Capital), February 11, 2008.
2. “It is this continuous embrace of our own technology in daily use that puts us in the Narcissus
role of subliminal awareness and numbness … We
have to numb our central nervous system when it
is extended and exposed, or we will die. Thus the
age of anxiety and of electric media is also the
age of the unconscious and of apathy. But it is
strikingly the age of consciousness of the unconscious, in addition. With our central nervous system strategically numbed, the tasks of conscious
awareness and order are transferred … the electric age gave us the means of instant, total fieldawareness. With such awareness, the subliminal
life, private and social, has been hoicked (sic) up
into full view, with the result that we have ‘social
consciousness’ presented to us as a cause …”
(McLuhan 1964, pp. 46-47)
3. “a time in the life of a business when its fundamentals are about to change. That change can
mean an opportunity to rise to new heights. But it
may just as likely signal the beginning of the end.”
Grove, Andy S., Only the Paranoid Survive, Preface,
1996, Dec. 2007
4. Paul Festa, “Key Dates in Browser History,”
CNET News.com 13 Oct. 2004, Dec. 2007
5. Steve Lohr and John Markoff, “Deal is Concluded
On Netscape Sale to America Online,” The New
York Times 25 September 1998, Dec. 2007.
6. Associated Press, “Microsoft Invests $240 million in Facebook,” www.msnbc.com 24 Oct. 2007,
Dec. 2007.
7. Interbrand Corporation History: 1980s.
8. Yates, Jane, “Brand Valuation and its Applications” Spring, 1999, July 10, 2007.
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9. “Spin out refers to a type of spin off where a
company “splits off” sections of itself as a separate business. The common definition of spin out
is when a division of a company or organization
becomes an independent business. The “spin out”
company takes assets, intellectual property, technology, and/or existing products from the parent
organization. Many times the management team
of the new company are from the same parent
organization. Often, a spin-out offers the opportunity for a division to be backed by the company
but not be affected by the parent company’s image or history, giving potential to grow existing
ideas that had been languishing in an old environment and help them grow in a new environment.”
www.wikipedia.org, February 8, 2008.
10. Lin’s research spans Asian and Western cultures and is of personal interest. My own early
interests in the application of social networks in
marketing began with my study (1994) of the cultural and economic success factors of network
marketing companies (such as Avon, AMWAY and
Mary Kay) in Asia completed before living and
working in China from 1995 to 2000.
11. Uzzi, Brian, “The Sources and Consequences
of Embeddedness for the Economic Performance
of Organizations: The Network Effect,” American
Sociological Review (opens PDF), Ms. #94-289, pp. 1
12. “Although one might have predicted that this
rumor (or that social media campaign or another
viral video contest!) succeeded largely because of
its inherent cleverness (something that should
stay constant over time) or the greed of Internet
citizens (something that should stay constant or
perhaps increase), such explanations provide little insight into why this rumor fluctuates.” Berger,
Jonah and Heath, Chip, “Idea Habitats: How the
Prevalence of Environmental Cues Influences the
Success of Ideas”, 2005, Cognitive Science, 29,
pp.195-221.
13. Burt, Ronald S., Structural Holes: The Social
Structure of Competition, (Harvard University
Press; Cambridge, Massachusetts, 1992) pp.27-28
14. “Value based management is the management
approach that ensures that corporations are run
consistently on value. (normally: maximizing
shareholder value),” www.valuedbasedmanagement.net February 13, 2008.
15. “Talent on Demand: Applying Supply Chain
Management to People,” Knowledge@Wharton,
Human Resources, February 20, 2008, March 3,
2008.
16. “SAP to Resell Nakisa’s Talent Visualization
Software,” www.sap.sys-con.com, Dec.11, 2007,
March 3, 2008.
17. “Internet Companies: Social Graph-iti,” The
Economist print edition, October 18, 2007.
18. Lin, Nan, “Building a Network Theory of Social
Capital” ©1999 INSA, Connections 22(1): 28-51,
see pp.28-31 for compact history of social capital.
19. Scott, John, Social Network Analysis, A
Handbook, Second Edition, (Sage Publications
Ltd, London, 2000) pp.7. See Chapter 2, pp.7-37
for history of development of Social Network
Analysis.
20. Larry Roberts in reference to the adoption of
Transmission Control Protocol, a standard that
has enabled the internet, which was orchestrated
by Bob Kahn and Vint Cerf. “An Oral History of the
Internet, How the Web Was Won”, Vanity Fair, July
2008, p. 104.
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About the Author
Michael Cayley (BPR, APMCP, MBA) is an entrepreneur, consultant and former CEO. He is the author of
“Introducing Social Capital Value Add” and he hosts the blogs Social Capital Value Add and Memetic Brand.
He greets possibilities with a Beginner’s Mind. You should connect with him. His professional profile is here.
Author Acknowledgements
I would like to thank Olav Sorenson, the Jeffrey S. Skoll Chair in Technical Innovation and Entrepreneurship and a professor
of strategic management at the Rotman School of Business at the University of Toronto. Olav has provided the guidance
and encouragement required to persist with the SCVA argument and conducted the first thorough review of the paper.
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